Lessons from Japan’s economic miracle

A plutonium bomb blasted Nagasaki just three days after an atomic bomb razed the city of Hiroshima. It was Aug. 9, 1945 and this marked the end of World War 2 and the painful defeat of Japan.

Japan was a country left in rubble. The bombings disrupted food production and the people lived in hunger. The economy, driven by the production of war supplies, came to a screeching halt as industrial production fell by 90%. Per capita income plummeted by a massive 47%.

Poverty was at an all-time high and the government was hard-pressed to provide the people with the basic essentials. Reconstructing the economy proved a challenge considering Japan’s small population (exacerbated by the lack of mature men, casualties of war), and the lack of natural resources and funds.

Yet, in just 23 years, Japan rose to become the second largest economy in the world, overtaking behemoths like France, Germany, and the United Kingdom. Japan is, without doubt, the 20th century’s most spectacular economic miracle. How did they do it? Japan’s rise from rags to riches offers valuable lessons for the Philippines.

Beggars can’t be choosers. Following their defeat in 1945, Japan had no choice but to accede to stiff terms in exchange for US reconstruction aid. Between 1946 and 1952, Japan received roughly $2.2 billion ($15.2 billion in 2005), of which almost $1.7 billion were grants and $504 million loans. In exchange, Japan was to be an ally of the United States and a vital instrument to its foreign policy for Asia. Japan committed not to form an armed forces for external attacks nor would it stockpile weapons of mass destruction. Rather, its military would focus on domain security.

Japan’s finances were buoyed by gold extracted from the Philippines and other Southeast Asian countries, all of which was used for its reconstruction.

Japan was wise in the way it utilized its reconstruction funds. It invested the lion’s share into rebuilding its steel mills, petrochemical plants, chemical laboratories, machine workshops, power plants, and glass and lens factories. In other words, it prioritized the fundamental industries for rapid industrialization. Companies such as Nippon Steel, Hitachi, and Mitsubishi Heavy Industries were given a new lease on life with government support.

The real game changer, however, was the government’s well-articulated statement of intent which quickly gained nationwide support. Japan was to rise from its embarrassing defeat to become an industrial superpower. It would restore its honor not by military might but by economic supremacy. This was the national vision and it was cemented in the minds of the populace, all of whom were enjoined (oftentimes socially pressured) to do their part in its realization.

To this end, a higher level of social discipline was demanded among the citizenry. The highest moral ethics were required from leaders, both in government and the private sector. Companies were encouraged to cooperate rather than compete. Banks were mandated to support rather than usurp. And the workforce was expected go over and beyond the call of duty. This gave rise to Japan’s culture of “collective gain.”

The government made a deliberate move to channel the savings derived by a 90% cut in military spending towards education. Emphasis was given to STEM learning in anticipation of its intended industrial wave.

The Japanese were keen to detect the flaws in the western industrial model and use these to their advantage. One of these flaws was the manner in which western industrial supply chains were structured.

In America and Europe, a supply chain would hinge on a principal manufacturer, say the Ford Motor Co. Ford would obtain its parts and components from multiple suppliers. Each supplier, in turn, would have their own subcontractors. These subcontractors would depend on a slew of raw material suppliers.

The relationship between each unit of the supply chain was based on short-term purchase contracts. These contracts would typically be good for one year — some as short as 30 days.

Should any of the units in the supply chain experience shocks like a sudden cost spike, a fire, or a labor strike, they would still be contract-bound to sell their products at the same price even at a loss. If they are unable to, Ford, or any unit in the supply chain, would simply drop them and award the contract to an alternative supplier.

The western model was based on the laissez faire principle of survival of the fittest among independent units. There was little room for collaboration or cooperation. Each worked for immediate profits, not for long-term objectives.

Japan designed an industrial ecosystem meant to foster growth via cooperation. This ecosystem is called the keiretsu.

The keiretsu is an interconnected network of companies characterized by strong alliances and cross-shareholding among its members. The companies in a keiretsu own small amounts of each other’s shares to strengthen their alliance. Hence, the success (or failure) of one unit is shared among all. A bank is usually at the center of a keiretsu and acts as the financier of the alliance.

Instead of having short term purchase contracts, members of a keiretsu are governed by contracts of as long as 25 years. The long-term nature of the contracts insulates the members from business shocks. Banks in the keiretsu offer financing to tide members across business slumps. They also offer soft loans for expansion.

There are two types of keiretsus, horizontal and vertical. A horizontal keiretsu consists of large independent companies that belong to different industry sectors. Normally, a bank and/or a trading company exerts influence in terms of decision making and overall strategic direction. Mitsubishi is an example of a horizontal keiretsu, where at the center is the Bank of Tokyo. Other members of the group include Mitsubishi Motors, Meiji Mutual Life Insurance, and Mitsubishi Shoji Trading Company, among others.

A vertical keiretsu is led by one large entity who is also the end user of the products of the supply chain. Vertical keiretsu are common in the automotive and electronics industries like Mazda and Sony.

The competitive advantages of the keiretsus model are vast. Because of the long-term nature of purchase contracts, members are able to invest in research and development for which engineering advances are shared across all members of the keiretsu. Due to resource sharing, members of the keiretsus are able to maximize profits. These profits are reinvested in R&D and better employee benefits. Cooperation is at the heart of every keiretsus. Each member leverages on the expertise of the other towards advancement. Thus, growth is accelerated, revenues compound, and market share expands. Keiretsus maintain a long-term view of business. They invest in conquering new markets and new product segments even if doing so incurs initial losses.

The formation of keiretsus is how Japan rose to become the second largest economy in only 23 years.

What are the lessons for the Philippines?

Government must clearly define the industries which the country aspires to dominate (e.g., artificial intelligence, high-precision manufacturing, etc.). The role of banks in industrial development must be strengthened. Education in STEM learning is a must. Foundational industries such as steel, chemicals, and precision equipment must be developed to foster rapid industrialization even if it requires government subsidies. Finally and most importantly, the government must clearly define its national vision and inspire the populace to support it. It must lead by example and demand the highest ethics among all Filipinos.