Japan, An Economic History: Sowing the seeds

Japan, the land of the rising sun, is a nation made up of 6,582 islands and one hundred and twenty seven million people. It is the world’s third largest economy, fourth largest exporter, the world's leading creditor nation for over twenty years, and an international hub for technological development. However, while the accolades sound impressive on paper, the nation finds itself in a difficult position: economically, socially and politically.

Persistent deflation, slow GDP growth and an overvalued currency have all contributed to the nations economic stagnation over the past couple of decades. These ailments further intensified following the Earthquake and Tsunami of 2011. Looking towards social concerns, for a culture steeped in concepts of honour and respect, poor employment prospects have had a psychological effect on younger generations. Birth rates have plummeted, in turn causing a looming pensions crisis, while the suicide rate is among the world’s highest. Politically too, the nation is in an uncomfortable position. Tension with China over the Senkaku/Diaoyu Islands has threatened to spill over into conflict over recent months, but in reality merely represents the latest in a series of rolling issues in the region involving the US and both Koreas too.

Four periods are noted as being pivotal in the nation's history: The foundation of Edo in 1603, The Meiji Restoration in 1868 ,post war reconstruction starting in 1945 and the Asset Price Bubble Crash of the early 1990s..

A nation, which has made a truly significant impact on how the world has developed in recent centuries, is at a crossroads. The implications are many and complex but before we look forward, we need to look back and understand the history and the culture of the nation, and how it came to be in its current predicament. In terms of economic significance, four periods are noted as being pivotal in the nation's history: The foundation of Edo in 1603, The Meiji Restoration in 1868 ,post war reconstruction starting in 1945 and the Asset Price Bubble Crash of the early 1990s..

Timeline of Japan's Economic History: An Infographic

Feudal Japan

Japan’s feudal period was characterized largely by immigration from mainland Asia and the emergence and dominance of a ruling class of warriors, the Samurai. Power was consolidated by a series of Shoguns (hereditary military dictators), between 794 and 1868 AD.

The Restoration of Edo

Edo is the former name of Japan’s capital Tokyo which was cultivated as a center of financial and political power by the Tokugawa shogunate who ruled Japan between 1603 and 1868. The city eventually grew from a small fishing village in 1457, into a bustling metropolis with an estimate population of over 1,000,000 by 1721, the world’s largest city at the time. This period is considered to have been the starting point of Japanese structural development.

Transportation routes evolved, and trade infrastructure became more sophisticated with the powerful rice brokerages of Edo and Osaka developing futures contracts, technical trading strategies, banking and insurance. As the shogunate ended in 1868, the city was renamed Tokyo (Eastern Capital), and the Emperor of Japan located his residence there, formally making the city the nation's capital.

The Meiji Restoration

The Meiji Restoration, spanning between 1868 and 1912, was a chain of events that restored imperial rule in Japan under Emperor Meiji and saw the nation step up from a feudal society into a market economy with an equally distinct, but subtle western influence. The period saw enormous changes to Japan’s political and social structure and came about as part of the 1866 Satsuma-Chōshū Alliance, which saw the nations most powerful domain leaders unite to overthrow the Tokugawa shogunate.

Prior to both the Meiji Restoration and the Edo period, Japan had been a relatively closed society and while there had been contact with western travelers, it had been relatively restrained. However, Japan was forced onto the international scene via veiled force, opening many eyes to how the nation was falling behind the rest of the world. When American Commodore Matthew C. Perry came to Japan to encourage the country to open up its ports to international trade, he did so on a fleet of warships, carrying technology which far outclassed what they Japanese had. This sudden realization of vulnerability inspired a revolution in approach and philosophy. ‘Meiji’ means ‘enlightened rule’ and the aim of the movement was to combine western advances with eastern traditional values.

The Meiji Restoration accelerated industrialization, which fast-tracked Japan’s rise as a military power

The Meiji Restoration accelerated industrialization, which fast-tracked Japan’s rise as a military power, and started to consolidate power from the remaining elements of the Edo-era government, the shogunate, daimyo and the samurai class. In 1868, the Tokugawa Shogunate had all its land and assets seized and placed under “imperial control”. By 1869, after a short period of localized militant action against resistant daimyos, the first central government in Japan had been created which had the ability to exercise direct power over the whole nation. The abolition of the samurai class as a whole proved a slower task, but eventually by 1876, the 1.9m samurai had agreed to reduced stipends, which were eventually replaced by government bonds.

Military reform took the form of forced conscription in 1873 and represented a colossal change in Japanese society. Previously, the key distinction between the samurai and peasants had been the exclusive right to bear arms of the former, which was suddenly abolished. Further, samurai’s were banned from carrying weapons in public as it highlighted their status. The samurai represented one of the four occupations (warriors, farmers, craftsmen and merchants), a hierarchical class system which had descended down from Confucianist China, that the Meiji Restoration sought to abolish.

A series of samurai rebellions and riots followed, which were successfully put down by the newly formed Imperial Army who had been trained in western tactics with western weapons. Despite the samurai rebellions being defeated, as a whole they quickly became assimilated in the new Japanese social structure as by virtue of their elitist past, they were best educated and connected and as such best suited to key roles within the bureaucratic and business sectors.

A period of land reform followed which was accompanied by a large-scale expansion of the western-based education system that had tentatively taken root during the Edo period. The reforms saw education extended to all children, and thousands of students were sent to the United States and Europe while thousands of western teachers were hired to teach science, mathematics, technology and languages in Japanese schools.

To promote industrialization, the government took the stand that it should act as the chief promoter of private enterprise, building factories and shipyards that were sold at a discount to entrepreneurs.

Further, the government rapidly developed its infrastructure to prepare the nation for further progression. To promote industrialization, the government took the stand that it should act as the chief promoter of private enterprise, building factories and shipyards that were sold at a discount to entrepreneurs. However, such rapid industrial expansion saw Japan come into conflict with its international neighbours and not before long, the Japanese Imperial Army announced itself on the world scene with two swift victories in both the Sino-Japanese War of 1894-1895 and the Russo-Japanese War of 1904-1905. The victory against Russia had the added virtue of being the first Asian victory against a European nation since the Mongols.

Following long standing and ongoing disputes with China, the Sino-Japanese War saw the Imperial Army gain valuable experience and confidence in its abilities, as well as capturing both Korea and Taiwan as areas of influence and territories alongside pockets of Mainland China. A side effect of the war was that the Japanese strength exposed Chinese weakness and highlighted the instability of the ruling Qing Empire. As a result, Western powers redoubled their influence in the region against the Japanese threat, rendering the ruling dynasty virtually powerless in its own country, and sowing the eventual seeds that lead to the Communist Revolution.

Buoyed by the success of its Sino campaign, the Japanese were not afraid to meet Russian advances into Korea and Manchuria with force after talks over port access broke down. A short but ruthlessly efficient campaign shocked the world and announced Japan on the global stage. Japan consolidated its position in the region and gained additional territory from Russia. The most telling side effect of Japan’s shock victory over Russia was that it exposed how weak and unprepared for war Russia really was. The failed reactionary revolution in 1905 hardly dampened revolutionary zeal in Russia, while German and Austro-Hungarian appetite for war was bolstered at the sight of one of its big rivals being humiliated by a supposedly inferior race.

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