The Japanese Miracle

Following the end of the Second World War, Japan found herself in ruins. Millions of lives were lost due to the bombs, and her wealth had shrunk by over a quarter. After her formal surrender, Japan came under the occupation of United States, led by the Supreme Commander of the Allied Powers, General Douglas McArthur. He was tasked with transforming the nation into a parliamentary democracy and restoring stability. The main reason for U.S. to increase its influence over Japan was to suppress the Soviet influence in the Pacific. Another reason was the fact that there were concerns over the state of the Japanese economy after World War II, where the unhappy and poor Japanese population might turn to communism, which would ensure Soviet control in the Pacific.

Post war Japanese economy faced numerous problems, unemployment being the biggest. With the army disbanded, over 10 million were left unemployed, consisting of troops and civilians that worked in military production. There were also concerns over shortages of energy and food. Dropping coal outputs after the war posed a problem since the energy sector depended mostly on it. In addition to the shortage of energy, there was also a shortage of rice – the all-important staple in the Japanese diet. With neither fuel nor food, people feared that they would starve to death during the winter of 1945-1946. This led to many jobless people moving into agriculture and coal production after the defeat, mitigating the issue of unemployment and shortages in basic necessities, and sparking the comeback of the nation.


There were three major policies implemented by the allied forces.

  • Breakup of the Zaibatsu

Zaibatsu is a Japanese term referring to industrial and financial business conglomerates that had a vast influence over the Japanese economy during the war. The main purpose for the dissolution was to dismantle Japan’s military, both psychologically and institutionally. They were treated preferably by the government through lower taxes and received huge funds for expansion. However, only partial dissolution took place as the U.S government needed them to keep the communist influence away.

  • Land reform

Prior to the war, most of the land were owned by the elite landlords, they were forced to sell their land to the government and those lands were resold to the farmers at an extremely low price. By 1950, more than three million farmers were landowners, dismantling a power structure that the landlords had long dominated.

  • Labour democratization

The major achievement from this reform was that it enabled the Japanese to form labour unions. An unprecedented growth in labour union membership occurred between 1945-1949 with membership going from 0 to 60% within 4 years. The rapid growth in membership could be attributed to dismantling the Zaibatsu. With the enactment of Trade Union Law of 1949, rights of the workers were guaranteed and unfair treatment of labour was prohibited.

The Dodge Plan

Due to rising tensions from the Cold War, United States needed a new strategy to fast-track the Japanese economic recovery. The Dodge Plan was implemented in 1948 as a solution to revive Japan with the ultimate goal of reducing its dependency on US aid. Three fundamental policies were introduced. They were achieving a balanced budget, suspension of new loans from Reconstruction Finance Bank, and reduction or abolition of subsidies. The goal of accelerating growth was impossible even with these policies in place but with the start of Korean War, the economy boomed overnight.

Korean War

The so called Korean War boom marked the beginning of the economic miracle where the economy experienced a rapid increase in production. Some economists claim that the Korean war gave the much needed “jump start” to the Japanese economy. Investment flooded into Japan as it acted as a US military base in addition to supplying military hardware in order to support the war.

Golden Sixties

The period of rapid economic growth between 1955 and 1961 paved the way for the “Golden Sixties”, the second decade that is generally associated with the Japanese economic miracle. The 15 years between 1965 and 1980 saw the nominal GDP jumping from $91 billion to over $1.065 trillion. The ambitious “income-doubling plan” was implemented under the leadership of Prime Minister Ikeda. Under this plan, the interest rates and taxes were lowered to motivate expenditure in compliance with expansionary fiscal and monetary policies. In addition to that, investments into infrastructure was given priority under Ikeda’s government. Even the communication sector that was long neglected was given priority. Each of these acts continued the Japanese trend towards managed economy that exemplifies the mixed economic model.


During the four decades after World War, Japan experienced unprecedented growth that placed Japan as an Asian giant and made Japan a major industrial producer. However, decades of growth came to an abrupt halt in 1991 when the asset price bubble burst causing a plummet in the stock exchange. Even due to that, Japan is still valued as the world’s third largest economy behind United States and China with a nominal GDP of approximately $4.4 trillion.


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The Japanese Miracle


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