The Origin of Shimomura’s Japanese Economic Miracle, or the Second Economic Bomb – Japan from 1946 to 1965 (Economic miracles Part 2)

August 1, 2013 12:00 am Published by Leave your thoughts

Japan is unique in many ways. The Japanese culture – its pursuit of perfection in many large and small ways, its enormous capability continually to renew itself and redefine itself in the light of changing circumstances, its clarity of vision and continually inspiring leadership, all merit our attention and in most respects our admiration.

Japan was the first Asian country to demonstrate how a self-confident culture, with adequate leadership, could rapidly adopt Western industrial technologies, improving them wherever that was found possible, while preserving the integrity of their domestic cultural legacy. The Japanese slogan for that attitude was “Western technology, Japanese Spirit”.

There were perhaps three major personalities which shaped and created the post-war investment credit creation economy of Japan.

The first was Mr Osamu Shimomura, who in 1945 was then a 35-year-old economics graduate of Tokyo Metropolitan University (where he had been an “A” student) and who had again visited the USA in late 1945, perhaps on the American sponsored Japanese-American Businessman Exchange Programme. He returned from his quick investigation of how the USA had grown so rapidly during the 1938-44 period with the know-how about how investment credit creation in the USA had produced a phenomenal growth rate.

The second was Joseph Dodge, the American banker and advisor to Japan’s occupation forces. As Ken Bieda comments, Joseph Dodge

“…recommended to the occupation authorities what one would expect a banker to recommend – a ‘sound fiscal policy’, that is, a balanced budget. At the time Japan had a great deal of unemployment and as economists generally consider a rigid balanced-budget policy at all times to be unsound, the Japanese Government did not like the Dodge prescription. Being subordinate to the Occupation Authorities who accepted the recommendation, the Japanese [Government] had to accept it too, and had to learn to live with it. This they did remarkably well.

A deflationary balanced-budget fiscal policy was pursued, but its deflationary effects were offset by an expansionary monetary policy.

Each year the Back of Japan created vast sums of credit for the “city banks”, which in turn expanded their credit creation to the business community. The latter borrowed so extensively that in the end their own capital represented only a small proportion of the capital obtained on loan from the banks.”

Ken Bieda, “The Structure and Operation of the Japanese Economy” John Wiley and Sons Australasia Ltd, Sydney, p107.

During the last four decades I have described this system to many Western economists, and several of these have told me, invariably for third-rate intellectual reasons, and from logical but wrong argument, that the combination of a deflationary fiscal policy with an expansionary investment-credit-creating monetary policy cannot be achieved. But that policy has been successfully practised in each of the three historically important investment credit economies – in FDR’s USA from 1938-44, in Japan from 1946 onwards, and in China from the mid-1970s to the present day – with economically miraculous results.

Some Japanese I have met have expressed surprise about my knowledge of, and interest in, Shimomura, who is honoured in Japan as the father of the Japanese miracle but disregarded and virtually unknown to nearly all non-Japanese politicians and economists (except maybe to the Chinese nowadays).

The third major personality was the Japanese Emperor who was persuaded of the need to implement investment credit economics. There is a key Japanese anecdote which I think might relate to both Shimomura and Mitsubishi. I have twice been told similar versions of it, once over lunch with some Japanese visitors in 1982, once in conversation in 1985 (after the Japan Conference at Magdalen College, Oxford). I have recorded that anecdote in one of my books (in “The Role of Banks in Economic Development, the Economics of Industrial Resurgence,” Macmillan, London, 1987, pp113-4).

A little background might help. Mitsubishi, more than any other member of the Japanese elite, was responsible for the production failure which led to Japanese defeat.

Despite the production of 11,000 initially superior Mitsubishi A6Ms (“Zero”) fighter aircraft and all their slight variants, the air battle for Japan was lost at Midway and elsewhere. Mitsubishi was also apparently a personal friend of the Emperor.

It is almost impossible now for any Gaijin to visualise how the Japanese felt about the surrender of the Empire of Japan to the Americans on 2 September 1945. Surrender had been an unthinkable concept for the Japanese elite because Japan had never lost any war or been occupied by any foreign power in its history. In the days following Japanese surrender, Hirohito received a stream of highly placed military commanders who queued up begging for an honourable seppuku (hara-kiri) death at the hand of their Emperor to pay for their inadequacy in war. It is impossible to say whether any or how many such requests were granted. The fact that this was going on was widely known at that time in Japan.

Richard Hughes, who was the Far Eastern Correspondent of the Sunday Times, the Economist and the Melbourne Herald, provides a sympathetic and detailed description about the Hara-Kiri death of General Anami and then comments that

“Of course, scores of other high-ranking Japanese officers followed Anami’s example and killed themselves in their homes or in front of the Imperial Palace on the next day.”

Richard Hughes, Foreign Devil: Thirty Years of Reporting in the Far East, p71, Andre Deutsch, London, 1972.

For days after the Japanese surrender, the palace gates in Tokyo were jammed every morning with corpses of the honourable dead, who had committed suicide in private ceremonies or in front of the Imperial Palace, and the Emperor found it necessary to issue a proclamation that the royal family, while understanding the sentiments of the Japanese people and their commitment to the eternal and divine Japan, were being inconvenienced by the need to clear the corpses away from the palace gates every morning, and if some people continued to feel the need to commit suicide, could they please do so at Aokigahara – which is the forest on the lower slopes of Mount Fuji. Even now, I am told that a Japanese reference to a final visit to the Mount Fuji forest may refer to an intended honourable suicide. That site, according to Wikipedia, is still currently the second most popular suicide location in the world (after the Golden Gate Bridge). See

There is a path through the forest which is cleared of corpses by volunteers every spring.

According to this anecdote, in late 1945 a Japanese Lord took a Japanese economist and commoner to an audience in the Palace with Hirohito, the Emperor of the Divine and Eternal Japan. That Lord was dressed in his flowing ceremonial robes, including a sword, and he had his head bowed and was kneeling on a tatami mat when his perfectly dressed sword-bearing Emperor entered the room. The commoner spent the entire audience with his nose pressed to the Tatami mat – it would have been not only bad ceremony but also possibly fatal to look up without the Emperor’s invitation to do so.

The audience began with the Emperor asking

“Why did we lose the war, my friend? Was it due to a lack of Japanese Spirit?” To which the Lord replied

“O my Divine Emperor, it was not due to a lack of Japanese spirit, but due to a lack of equipment, and I promise you that it will never happen again.”

At that point, the Lord insolently looked up, giving his Emperor permission to kill him. But the moment of maximum danger passed and the Emperor asked

“How could that never happen again? And who is this person with you?” and the Lord explained that one of his honourable servants had discovered, through his visits to the USA, how Japan could recover and grow great again. Eventually Hirohito said

“Let that come to pass” and the Lord survived the interview. The Japanese Diet were informed of the Emperor’s wishes that Japan should adopt a new economic understanding in order to ensure rapid economic recovery and everything required for that eventuality fell into place.

The rest really is history. Was the Lord actually Mitsubishi? Was the commoner Shimomura? Is that anecdote an after-the-event historical myth or did such an interview actually happen?

This anecdote, for me, has a mythical ring, in which everyone involved is acting within the highest morality of which they are capable. The Emperor, highly intelligent, merciful, and longing for the answer that there had been no failure of “Japanese Spirit”. Mitsubishi, subservient to his Emperor, contrite, accepting his fate whatever comes, but possessing an answer to the economic problems of Japan. Shimomura, 35 years old, nose pressed to the tatami mat, silent, bright beyond most dreams of brilliance, honoured by being present at that historic meeting.

Or as Kung Fou Tse (whom the barbarians call Confucius) might have said, “Each has acted correctly, that is to say, each within his nature.”

Whatever the truth of that anecdote, what appears to have happened in post-war Japan was

  • Mr Joseph Dodge, the American Advisor to the Occupation Authorities, recommended a balanced budget, which the Occupation Authorities accepted and which the Japanese Government had to obey
  • Shimomura on his part persuaded Mitsubishi about the need for a policy of investment credit creation to enable Japan’s rapid economic recovery
  • Mitsubishi met with and convinced the Emperor of the usefulness of that course of action
  • The Japanese Diet and the BoJ adopted ICC and an investment-favouring monetary policy as their creative response to the required adoption of a tight fiscal policy enforced by the Occupation Authorities.

Or, as Bieda puts it

“The Japanese managed to extract another advantage here. Under the circumstances of a rapid growth in the level of activity and incomes (the latter due conjointly to the high level of unemployment at the outset and the generous credit expansion) Dodge’s “balanced- budget” principle led in fact to a super-balanced budget although the tax rates were occasionally reduced.”

Bieda, ibid, p107

In other words, if a government starts with a balanced budget and follows a policy of investment credit creation, the extra jobs and income produced by the investments from that credit creation will result in higher tax receipts and instead of the government having a balanced budget it will have a budget surplus the following year. As long as the ICC policy is followed, there is likely to be a budget surplus year after year, and the normality of that situation enabled the Japanese Government to invest in the restoration of, and improvement in, the social overhead capital – in the roads, schools, hospitals, universities, government administration buildings and all the other social infrastructure essential to a developed economy – out of last year’s budget surplus. Eventually of course the Japanese Government realised it could spend in each year not only the capital amounts it had committed the previous year, but the extra income that was forecast to happen in-year.

Furthermore, when personal incomes are increasing rapidly, personal savings also increase rapidly. In Japan, where employees of major corporations are naturally expected to have their incomes paid via a company bank account, these savings can be borrowed from the bank by the corporation to increase company funds available for investment.

The super-balanced budget did not limit business activity because the productive engines in the economy – the plant and equipment in the factories – was being financed by investment credits plus other bank borrowing, as well as by normal and special rapid depreciation allowances which avoided taxes on company profits.

As Bieda again comments

“The fact that the monetary policy was expansionary not only made the crazy fiscal policy tolerable, but encouraged capital formation because trading bank credit is used almost totally for capital formation (and hardly ever for consumption).

This is another example of how the un-doctrinaire pragmatic Japanese approach extracts advantages out of disadvantageous positions. Dodge and the Occupation Authorities had the cake (locked up) and the Japanese managed to eat it (by investing the resources.)”

Bieda, op. cit, p108.

Investment credit creation means, as Kurihara has observed, that underdeveloped nations (which are best referred to as “under-equipped nations”) do not have to wait on the runway for an economic take-off into much higher growth. The rate of economic development can be greatly accelerated by a policy of fiscal stringency and directed monetary expansion to enable a “catch-up” with the level of Western development within a brief few decades.

Perhaps the most interesting assessments of the American Occupation of Japan are from a father and son – from Shigeru Yoshida, the last Prime Minister of the Occupation Forces and the First Prime Minister of Independent Japan, and his son, Kenichi Yoshida, a notable Japanese author. Richard Hughes reports on their views:

“Shigeru Yoshida: General MacArthur never issued orders to me. I discussed matters with him, and he then reached conclusions….Criticism of the Americans is a right accorded even to the Americans. But in the enumeration of their faults, we Japanese cannot include their occupation of Japan.

“Kenichi Yoshida: I believe that the Occupation has been of great value to Japan. For two reasons:

First, we Japanese are very proud. But we have never been humbled before. And there can be no true pride without some acquaintance with humility.

Secondly, not all of our people have had the opportunity, as I have had, of travelling abroad, and observing Western customs and culture at first hand. In the shock of defeat at the hands of a powerful and ruthless enemy, some of our young people might easily have mistaken military victory for superior culture.

Happily, the American Occupation brought to Japan its own culture and living habits, and our people were able to study for themselves personally the behaviour of the West and reassure themselves gratefully of the enduring superiority of the Japanese way of life.”

From Richard Hughes, Foreign Devil: Thirty Years of Reporting in the Far East, p72, Andre Deutsch, London, 1972.

Quite so.

© George Tait Edwards 2013


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