The Fruits of Civilization (25-2) Japan

Japan

The last and most surprising of industrializers in the 19th century was the island nation of Japan. Historically in the Chinese sphere of influence, the land of the rising Sun ended up adopting the worst of Western folkways and paying the price for it.

Japan was run by regional warlords until the decisive Battle of Sekigahara in 1600, whereupon Tokugawa Ieyasu took power as shogun. The Tokugawa period lasted 15 generations: over 2 and a half centuries of societal stability.

Japan during the Tokugawa period epitomized feudal society. It was a holdover from the earlier Azuchi–Momoyama period, when Toyotomi Hideyoshi was the preeminent daimyō (warlord).

Hideyoshi had imposed a strong caste-based society, including the stricture that only the samurai (warrior) class could bear arms. During his rule Hideyoshi lavished money on the tea ceremony and other cultural refinements. This patronage of the arts continued in the Tokugawa regime.

While the samurai were the highest-status caste, the lower orders comprised peasants, merchants, and artisans. 80% of the population were peasants. As producers, peasants had a higher social status than merchants and artisans, but were much poorer, as they bore the brunt of heavy taxation. The lowest rung of the social ladder was occupied by entertainers, prostitutes (intimate entertainers), servants, day laborers, beggars, thieves, and hereditary outcasts. These people were tightly controlled by local officials and not allowed to mingle with those of higher standing.

In the early 17th century the shogunate suspected foreign missionaries and traders as front men for military conquest by European powers. Foreign possession of firearms was frightening, but more so the spiritual disease these aliens were infected with: Christianity, which had spread among the populace, especially peasants.

The loyalty of Christian converts was doubted by the Japanese political elite. Persecution ensued, which led to the Shimabara Rebellion in southwestern Japan in 1637. 30,000 rebels faced a samurai army of more than 100,000. The revolt was crushed at a heavy toll in lives.

After eradicating the rebellion, foreign access and trade was tightly restricted. Only Dutch and Chinese merchants were allowed at a trading post on the man-made island of Dejima in Nagasaki Bay. Whereas the Tokugawa rulers had used firearms to establish political unity and stability, guns were outlawed, to prevent their spread.

While exclusion was policy, Japan was not so isolated. The Dutch brought Western innovations, such as clocks, telescopes, microscopes – and scientific knowledge. That the Dutch were Japan’s sole Western trading partner was fortuitous, as the Dutch were at the time the most economically and scientifically advanced.

Samurai comprised some 6% of the population. Paid a stipend for services no longer needed (as there were no external enemies, and samurai were not policemen), samurai were essentially unemployed. The ruling daimyō (samurai civic leaders) grew increasingly wary of the large numbers of their idle brethren, so samurai were corralled into castle towns where they could be easily watched and controlled.

The wealth and status of the average samurai slowly deteriorated as the Tokugawa era wore on. It was not unusual for a down-on-his-luck samurai to sell his treasured swords and title to a commoner. Even worse was for a samurai to lower himself to engaging in commerce.

Meanwhile, the condition of peasants was desperate. Daimyō often viewed them as livestock: forbidding peasants to move or sell their possessions and extracting as much as half of their meager crop yields. The lives of these Japanese serfs were even more wretched than their European counterparts.

The primary paradox of Tokugawa rule – by samurai – was that its chief victims were samurai. Samurai were the easiest target for revenue-starved daimyō, who gradually ratcheted down samurai stipends, which amounted to half of government expenditure. When the clock ran out on the shogunate, disaffected samurai were on the front line of the revolutionary vanguard.

Simultaneous with the Spanish economic self-immolation half a world away, the Tokugawa regime methodically throttled the dynamics that might have provided economic security. Rigid social structure, heavy tax extraction on peasants, artisans, and merchants, and lack of property rights meant no development of capital markets, and hence no engine for economic growth. That the daimyō themselves had no interest beyond self-preservation in the status quo spelled stagnation. (1600–1820, Japan’s per capita growth was an estimated 0.14% per year: sluggish, but impressive for an isolated feudal state.)

Shogunate fear of foreign invasion came to frightening fruition in 1853, when US naval Commodore Matthew Perry sailed into Yokosuka harbor in Tokyo Bay in his black ships. Perry responded to Japanese demands to go to Nagasaki by bombing some buildings in Uraga, the nearby town. Perry’s own demand was that Japan open itself to trade; this from President Millard Fillmore, one of America’s sorrier sovereigns (of which there have been several).

The Japanese had already been alarmed by the outcome of the 1839–1842 Opium War in China, then shocked by Perry’s arrogance. This was followed by British naval bombardment of Kagoshima in 1863, along with a multinational incursion at the Shimonoseki Strait 1863–1864. In response to forcible demands by militarily superior foreigners, the Tokugawa shogunate had opened the country to foreign trade, along with other reforms: measures bitterly resented by many daimyos and met with bellicose opposition which provoked belligerent foreign response.

When a country first opens itself to trade, it experiences “price convergence”: a euphemism for economic shock from tectonic price movements in commodities, labor, land, and capital. Since the prices of Japan’s export products – rice, tea, and silk – were far below world levels, price adjustment made traders and landowners rich, while creating scarcity for domestic consumers. Simultaneously, cheap foreign cotton and industrial equipment caused prices in Japan to drop precipitously, distressing Japan’s domestic producers. Peasant and samurai alike blamed the shogun.

Despite economic difficulties, what Japan did have was a well-educated people. Literacy was highly prized throughout Japanese society. By the 1780s, 3,000 books a year were being published in Japan, comparable to western European countries. Russia at the time published 400.

In the 1850s, geographic books and translations of Western scientific literature were trendy, reaching a wide audience. By 1860, 40% of rural men and 10% of country women could read and write. Literacy was much higher in towns and cities. In Edo (Tōkyō) it was 80%.

In 1868, a group of capable southern samurai overthrew the shogunate, ushering in the Meiji Restoration. One thing was clear: the clock could not be turned back. The new regime accelerated what the Tokugawa had already started.

Japan immediately embarked upon rapid modernization. In came a new constitution, with legal and educational systems modeled upon Germany. The Japanese picked its institutional role models from Western civilization. Western culture became fashionable. The military was modernized; Japan again followed the German/Prussian model.

The 1st World War proved a boon to the Japanese economy, as it was able to expand into foreign markets. Entering the war on the Allied side meant that Japan took over German colonies in the Pacific and concessions in China. Exports went from 6% of total output in the 1880s and 15% in the 1st decade of the 20th century to 22% by 1915. Deprived of the ability to erect tariff barriers, the rigors of international competition toughened Japanese companies.

Japan presented a most astonishing story of industrialization. Growth was relatively stable. The Japanese economy suffered less during the Great Depression than most other nations.

Japan’s adoption of Western ways included outsized aggression. In 1894–1895 it quickly defeated China in a short war, joining the ranks of imperialist nations by annexing territory.

Japan gave Russia a bloody nose 10 years later but gained scant territory or recompense in the treaty that followed, owing to pressure from the US. Riots in major Japanese cities erupted, demonstrating that the seed of discontent against American power had been planted.

Japanese capitalism followed the same exploitative arc that it did in Western countries. In the mid-1930s, Japanese wages were 10% of those of Americans, while Japan’s price level was 43% that of the US.

The purchasing power of the average Japanese was 32% that of an American in 1935. High energy and housing costs especially crimped consumers’ pocketbooks.

Depressed wages and low consumption owed to weak unions, corporate collusion (zaibatsu), and militarism. The Japanese government was on a war footing, intent on empire building. The government was completely content with a corporatism which served under its thumb.

As the 1930s wore on, Japan was increasingly perceived as a threat by Westerners, especially in America. Foreign trade suffered. By the end of the decade, a US trade embargo was cutting off Japan’s raw material supply. Japan went to war because US economic aggression had given it no other option.

Japan’s militarization ultimately led to ruin. World War 2 economically turned back the clock; but not for long.

40% of the country’s infrastructure and industries were destroyed in the War. Devastated, the Japanese devoted themselves to restoring their nation. The US occupation (1945–1952) facilitated rebuilding.

The Japanese suffered none of the guilt that wracked the German conscience over its Holocaust. Instead, the pacifist constitution imposed upon them was taken to heart by the majority of the populace.

Japan had, as ever, a relatively pitiable base of natural resources beyond its own people. That was enough. The Japanese were well-educated and disciplined. Despite military defeat, its unity as a nation was unshaken.

While physical assets had been devastated in the War, Japanese retained the social infrastructure for production, distribution, and finance. Released from the demands of a militarist regime, the economy quickly rebounded. By the mid-1950s production matched pre-war levels.

In 1955, 40% of the labor force made their living in agriculture. This declined to 17% by 1970 and dropped to 7.2% by 1990.

As the country began to prosper in the 1960s, Japanese workers were disciplined in their wage demands. Labor union cooperation kept salaries in line with productivity gains.

The Japanese continued to be a thrifty people, saving as much as they could. This provided the capital base for growth in the first 2 decades following the War.

Prior to the War, concentrated wealth – zaibatsu – dominated industry. After the War, in place of zaibatsu rose keiretsu: concentrated wealth that dominated industry. For instance, Mitsubishi, the maker of the formidable Zero fighter airplane and other military hardware, transformed itself into Mitsubishi, the maker of non-military industrial products. The other keiretsu had similar roots.

Keiretsu were a vertical integration of suppliers, manufacturers, and distributors, backed by a large bank. Oligopoly, the natural maturity of capitalist endeavor, was in full flower in post-war Japan, allowing rapid economic advance, just as it had afforded efficient militarization before the War. In the minds of industrialists, only the venue for domination had changed.

In the 1960s, cheap Japanese imports into the US delighted consumers with their cost but were derided for their quality; a deficiency soon remedied. 40 years later, the Chinese would repeat this performance, though with much less panache.

Rapid growth in Japan and China were accompanied by massive pollution. Careless fouling of the environment was consistent with every country that has industrialized. Only when catastrophe strikes can a nation be turned to some degree of appreciation that filth can only go so far. Even then, the response is always muted, as there is always opposition to environmental sustainability. No government beholden to capitalism is going to take its industrial conglomerates to task. For Japan, Minamata is symbolic.

 Minamata

Chisso Corporation opened its chemical factory in Minamata in 1908. It initially made fertilizer before expanding into an array of industrial chemicals.

Chisso dumped its waste products into the neighboring Minamata Bay. Fish kills resulted in compensation agreements with local fishery cooperatives in 1926 and 1943. Other than capital outlays, nothing changed.

In 1932, Chisso started producing acetaldehyde: a carcinogen with numerous industrial uses as a solvent and reducing agent. Acetaldehyde is made using mercury sulfate as a catalyst.

Chisso produced 190 tonnes of acetaldehyde in 1932. By 1951, 5,400 tonnes of acetaldehyde were churned out by Chisso. In 1960, Chisso produced over 41,000 tonnes of acetaldehyde. All the while, the company dumped its waste into the bay.

In 1956, after finding numerous people, including children, stricken by severe neurological damage, local health officials declared an “epidemic of an unknown disease of the central nervous system.”

Wastewater from the Chisso plant was immediately suspected. But it was not until 1959 that mercury levels in the bay were investigated, to the shock of researchers.

This should have come as no surprise. Fishing catches from Minamata Bay had declined by 91% between 1953 and 1957.

The prefectural government responded with a partial ban on the sale of fish from the polluted bay. They declined to declare an all-out ban, as the government would have been obliged to compensate fishermen if they had done so. Only after breaking into the Chisso factory and rioting, with attendant press coverage, were fishermen able to obtain compensation from the central government.

Those with Minamata disease had less political clout. In 1959, they managed to eke out from Chisso ¥100,000 (US $278) per year for adult victims and ¥30,000 ($83) for children. Families of the certified dead were granted a one-time payment of ¥320,000 ($889).

Ordered by the government to install wastewater treatment, Chisso deceived all involved that it had done so. The crisis was declared at an end.

Chisso did not stop dumping substantial quantities of mercury into the bay until 1969. In the interim, the government ignored continued reports.

Other Japanese companies followed in Chisso’s footsteps, though none gained as much infamy.

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Japan’s economic growth in the 1960s and into the 1970s was industrial: steel, ships, vehicles, chemicals, and electronics. By the late 1970s services had become a more prominent part of the economy.

In the 1980s telecommunications and computers surged in commercial importance. Tokyo became a major financial center. Industrial growth begat some the world’s major banks.

By the 1970s, by dint of relentlessness in their incremental quality improvements, Japan was increasingly considered an economic threat by US industry and its government ally. By the 1980s, Japan became synonymous with quality in the eyes of American consumers.

Economically, on the world stage, the 1980s was Japan’s heyday. Its export engine was helped by a strong US dollar.

The Reagan administration pulled the US out of the 1981 recession with deficit spending. This led to a strong rise in domestic demand. Still stuck in the doldrums, the export engines of Germany and Japan revved up in response.

Then, worried about the strong dollar, Reagan muscled through an international agreement (the 1985 Plaza Accord) to depreciate the US dollar in relation to the Japanese yen and German mark through concerted intervention in currency markets.

A cheaper dollar improved the international competitiveness of American manufacturing, and accelerated US export growth. The Germans and Japanese suffered.

The Japanese perceived this as a serious crisis, so the government and central bank met it with the stratagem of cheap money. Interest rates were drastically reduced. Construction companies and brokerage firms were given generously cheap loans.

The scheme was to fuel speculation (particularly in real estate) and ramp the economy, with the hope that export corporations would invest more, and so augment their competitiveness. It worked. Growth got into gear. The trade surplus bloomed anew.

But a tremendous asset bubble was being blown. By the summer of 1987, the Japanese Emperor’s palace grounds in Tokyo was hypothetically priced higher than all the real estate in California.

Having succeeded in its excess, the government aimed at gradually deflating the bubble blown. Between May 1989 and August 1990, the prime lending rate went from 2.5% to 6% in a series of increments.

Deflation duly began in 1990, but the economic effects weren’t as gradual as the government had hoped. The bubble burst in a big way in 1992, and the economy refused to revive over the next quarter century (to present day), despite repeated monetary ministrations.

Falling asset prices and a sputtering export economy led to bankrupt companies, insolvent banks, and deflation. Japan lost its vaunted technological edge to South Korea, while China and southeast Asia gobbled the low end of the export market.

The end of the Japanese bubble economy and long-lasting stagnation is rather easily understood. Companies had made their investment decisions based on the assumption that the good times would continue to roll, albeit curbed a bit by the central banks. Instead, assets worth many billions of yen vanished when the bubble popped. The consumption frenzy abruptly ended. With it died many investment plans.

Fear spread. Companies found themselves sitting on enormous overcapacities. People saw their retirement pensions endangered. Panic saving set in.

The value of the yen rose 1985–1990 as its economy boomed. This hurt exports. But with their trade surplus, the Japanese invested a large portion of capital abroad, which tempered the effect on corporate profits.

Then came the drastic drop in the home economy. Yet, after a brief decline 1990–1991, the yen rose again until early 1996. Exports kept dropping with domestic demand in the doldrums.

The longevity of stagnation was abetted by the structure of the Japanese economy. Unlike other countries, large Japanese companies, warranted by the government, wove a web of relationships between finance and manufacture.

This interlocked system had been a great boon when the Japanese needed to get off their economic knees in the post-war period, and to finance its subsequent export push. But when the economy weakened, the mutual support system meant that the largest industrial and financial corporations could hang tough much longer than they should have. This delayed clearing the decks so that the economic dance could get back into swing.