Japan

How Entrepreneurs Created the Great Boom That Made Modern Japan
http://www.forbes.com/sites/jimpowell/!"/!#/"#/how$entrepreneurs$created$the$
%reat$boom$that$made$modern$japan/
In less than two generations, during the late 19th century, Japan transformed itself from a
medieval backwater to a dynamic modern economy. They did it with comparatively little
outside capital, public or private. It’s probably fair to say that Japan was more successful
than any of the nations that, decades later, received governmenttogovernment
assistance through the !arshall "lan, the #orld $ank or the International !onetary %und.
$eyond protecting private property, providing an essential legal framework and eliminating
many barriers to enterprise, the Japanese government was actually a minor player. There
were do&ens of governmentowned businesses, but almost all of them lost money and
were subse'uently privati&ed. "restigious heavy industries favored by the government
never added as much value as humble light industries like te(tiles that thrived with few
subsidies.
)conomic historian %rank $. Tipton, Jr. pointed out that *#hen the central government
attempted to introduce new technologies, it generally failed. In fact, monetary and credit
policies probably hindered development.+ ,istorian )dwin -. .eischauer declared, *It was
private initiative that produced the bulk of Japan’s economic moderni&ation and growth.+
The Tokugawa /h0gunate, as the Japanese military government was called, had virtually
cut off Japan from the outside world since /h0gun Ieyasu sei&ed power in 1123. The
/h0guns presided over a hereditary caste of feudal lords known as daimyo, below whom
were samurai warriors ruling some 412 local 5urisdictions. $elow the samurai were
peasants, then crafts people and finally merchants who were the lowest of the low.
The government enforced suffocating restrictions on economic activity. "eople weren’t
free to choose their occupations. )ntrepreneurs were limited to serving local markets. It
was illegal for ordinary people to purchase lu(uries like silk, which meant that production
was always small. 6ontact with foreigners was banned, e(cept for merchants permitted to
see 7utch traders on 7e5ima, a small island off 8agasaki. 9nyone caught trying to leave
the country was sub5ect to the death penalty.
!any Japanese, however, were curious about the outside world. 9 few escaped their
country aboard 7utch merchant ships or 9merican whalers. 7utch books were smuggled
into Japan. !any samurai sold their precious swords to get 7utch grammars, so they
could read 7utch technical books. .elying only on book learning, resourceful Japanese
entrepreneurs produced pens, ink, chemicals and medicines.
!eanwhile, the :nited /tates turned toward the "acific $asin. 9merican whaling ships
operated in the 8orth "acific, and 9merican clipper ships worked the 6hina trade. Japan
seemed like a logical place for steamships to replenish their coal and other provisions. %or
many years, 9mericans had tried to trade with Japan, but the /h0gun insisted on
maintaining Japan’s isolation.
-n July ;, 1;<3, the 9merican 6ommodore !atthew "erry appeared in )do =Tokyo> $ay
with four wellarmed ships, two of them steampowered ? something few Japanese had
ever seen. "erry’s cannon could have devastated the city, and because much of the city’s
food arrived by sea, he could have inflicted a painful blockade. /h0gun Ieyoshi would
have been helpless. "erry e(pressed a desire to begin peaceful relations, then sailed on
to 6hina. ,e returned a year later with eight ships, making clear that the 9merican threat
had to be dealt with.
/h0gun Iesada, who succeeded his father after "erry’s first visit, reluctantly agreed that
=1> 9mericans could conduct trade not only in 8agasaki like the 7utch but also in
@okohama, Aobe, 8iigata, /himoda and ,akadoteB =4> tariffs would be kept at a low <
percent for the ne(t C2 yearsB =3> 9mericans in Japan would be sub5ect to 9merican laws,
and violations would be handled by the 9merican embassy, not by Japanese courts. The
/h0gun subse'uently signed similar treaties with $ritain, %rance and .ussia.
These treaties provoked a powerful (enophobic backlash within Japan. The /h0gun lost
face for permitting foreign goods into Japanese markets and for agreeing that foreigners
would be e(empted from Japanese laws. -utraged samurai demanded that the /h0gun
*e(pel the barbarians,+ but clearly he was unable to do that. %orts controlled by the
samurai fired on foreign ships. 9n 9merican ship responded by sinking two Japanese
gunboats, and %rench soldiers destroyed the forts. They were rebuilt, and again they fired
on foreign ships. 9 fleet of 1D 9merican, $ritish, %rench and 7utch ships destroyed the
forts and e(tracted an agreement that they wouldn’t be rebuilt. The an(ious Japanese
referred to all unwelcome #estern vessels as *black ships.+
.ebellious samurai managed to ac'uire #estern ships and rifles for their struggle against
the /h0gun Aeika, the latest dictator who proved unable to get rid of the foreigners.
Japanese scholars portrayed )mperor A0mei, a ceremonial figure, as the nation’s spiritual
leader. These scholars called for a revival of /hinto religious doctrines that involved
emperor worship. The emperor, in turn, gave his blessing to the samurai. The /h0gun’s
soldiers were armed only with traditional twohanded swords, and when the samurai
overthrew him in 1;1;, the Japanese could grasp the crucial importance of achieving
technological superiority.
The samurai couldn’t agree on who would be the ne(t /h0gun. "eople rallied behind
)mperor A0mei, 31, hoping that he might help Japan avoid becoming a #estern colony
like much of 6hina. ,e tried to regain power that had been ceded to the /h0guns over the
years, but the Japanese weren’t accustomed to taking orders from an emperor. In any
case, )mperor A0mei died suddenly in January 1;1D, possibly from poisoning. ,is son
ascended to the throne and became )mperor !ei5i. 9 new era became known as the
*!ei5i .estoration+ ? the emperor’s status if not his power was restored. ,e moved his
residence from Ayoto to )do and renamed it Tokyo =*)astern 6apital+>. $ut since he was
young E perhaps only 1C E he wasn’t able to run the government. 7ecisions reflected an
uneasy consensus among samurai and top government officials.
9lthough the /h0gun’s failure to deal with foreigners had brought him down, the new
ruling group reali&ed they didn’t have any answers, either. Japanese *learning missions,+
each consisting of as many as several do&en people, were sent abroad to learn about
foreign science, technology, engineering, law, economics and other fields. They reported
that Japan was more backward than had been reali&ed, and somehow the country must
moderni&e fast.
The government introduced a number of dramatic reforms that set the stage for economic
growth. %eudal domains were abolished. 9ll social classes were to be e'ual before the
law. The government abolished barriers to domestic trade, and as noted, treaties
committed Japan to a lowtariff policy for international trade. Fuilds were abolished,
enabling people to choose occupations freely. "roperty rights were e(panded so that
practically anyone could buy land, and farmers could plant whatever they wanted.
#ith the feudal order gone, the samurai E about 4 million men ? lost their 5obs. They
were a potential source of discontent and revolt. /o the government gave them pensions
that were between one tenth and one half of their previous feudal stipends. The pensions
consumed about a third of the government’s budget, and the plan was for them to be
converted gradually into lumpsum payments.
The government brought in about 3,222 foreign advisors to help design and implement
reforms. 9lthough all the advisors were #estern, they represented a range of conflicting
views, from )nglish advocates of free markets and peace to "russian advocates of
protectionism and militarism, with other advisors somewhere in between. Japan adopted a
parliamentary system based on the e(perience of Freat $ritain and "russia. 9 compulsory
education system was introduced on the %rench model. Japan looked to "russia for
guidance about reorgani&ing the army and to Freat $ritain for guidance about
reorgani&ing the navy.
#ith tariffs limited to < percent, imports surged into Japan, and businesses as well as
consumers were free to take advantage of the best deals wherever they might be
available. #estern goods and ideas appeared all over Tokyo. )mperor !ei5i set an
e(ample for adopting #estern ways. 9fter 1;D4, he dressed not in traditional Japanese
robes but in a #estern uniform or a swallowtail coat and silk top hat. ,e rode about in a
#esternstyle coach rather than the traditional palan'uin. !ei5i ministers abandoned the
traditional practice of shaving their eyebrows and blackening their teeth.
-rdinary people combined #estern clothing with traditional clothingB to wear a kimono
over slacks, for e(ample, or a frock coat with a sword. %ewer and fewer men continued
the traditional hairstyle some hair shaved entirely off, the rest long and gathered into a
top knotB by the 1;;2s, some 92 percent of Japanese men favored #esternstyle *random
cropping.+ Japanese discarded traditional bambooandpaper umbrellas and started using
imported umbrellas which were dubbed *bat shades.+ Fold watches became popular.
!odern newspapers flourished in Tokyo. /chools began teaching knowledge of the #est.
7ry goods shops like 7aimaru evolved into department stores. .estaurants opened to
serve #esternstyle beef.
Gow tariffs mean that Japanese producers could ac'uire less e(pensive raw materials,
which helped them become more competitive. /ometimes Japanese entrepreneurs could
tap foreign investment capital. The $ritish, for e(ample, helped finance a railroad
connecting Tokyo and @okohama =1;D2>.
9midst the prosperity, many small producers had difficulty adapting to the tumultuous
changes, and the government began doing bailouts. %or instance, economic historians
Johannes ,irschmeier and Tsunehiko @ui reported that *!aritime Insurance 6ompany had
to be rescued by the government, yet the company continued its practice of not
accumulating reserves, of accepting foreign contracts with only loose checks, and high
dividend payments of 12 to 11 percent.+
The government decided to 5umpstart the economy by *targeting+ private firms E giving
them subsidies. $ut officials didn’t do well trying to pick winners. %or e(ample, the
government helped three merchant houses ? /himoda, -no and !itsui. Gater, when
subsidies were withdrawn, only !itsui survived. The government subsidi&ed many
businesses started by samurai, most of which went bankrupt.
The government awarded contracts, subsidies and monopoly privileges to companies that
evolved into the &aibatsu =conglomerates operating a wide range of businesses>. %or
instance, because !inomura .i&aemon, chief e(ecutive of the !itsui moneychanging
firm, had backed the !ei5i .estoration government early on, !itsui was awarded lucrative
contracts to provision the army. The government considered shipbuilding a national
security issue and awarded monopoly privileges to the !itsubishi &aibatsu.
In any case, the &aibatsu didn’t dominate the Japanese economy. 9t the end of the !ei5i
period, in 1914, about 12 percent of Japanese people still worked in agriculture. Japan’s
biggest e(porters were unsubsidi&ed silk and cotton producers. 9ccording to economic
historian #illiam Gockwood, *it was the e(pansion of Japan’s basic economy ?
agriculture and smallscale industry built on traditional foundations which accounted for
most of the growth of national productivity and income during the !ei5i period.+
The government tried starting new businesses. There was a governmentowned telegraph
system and a rail network. The government pursued shipbuilding, brick production and silk
manufacturing. $y the mid1;D2s, according to an official report, the government owned
three shipbuilding yards, <1 merchant ships, <4 civilian factories, two munitions factories
and D< miles of railways.
$ut almost all these governmentowned businesses were a bust. %or e(ampleH
I The government’s %ukugawa cement factory and the Tokyo Fas 6ompany lost money.
I Fovernmentowned shipyards in 8agasaki, considered essential for national security,
weren’t able to do more than minor repair work.
I Fovernmentowned railroads cost twice as much per mile to build as private railroads.
$y 1;94, private companies had built 1,342 miles of railroads, double the mileage of
government railroads.
I In 1;D2, the government established the 8ippon "ostal /teamship 6ompany for
passengers and cargo. This soon ac'uired a reputation for inefficiency, and an
entrepreneur named Iwasaki @ataro decided he could do a better 5ob. ,e started the
!itsubishi 6ompany and declared, *#hile they make use of government protection and
are boastful and overbearing, we of the !itsubishi strengthen our internal controls and go
out of the way to please people.+ #ithin a few years, !itsubishi became the leading
Japanese steamship line, and the government was among his customers.
I The government couldn’t even turn a profit in a traditional business like silk reeling. The
most conspicuous failure was the grandiose Tomioka %iliature. It became a makework
scheme for hundreds of samurai daughters. !anagers closed the factory to visitors, so
they couldn’t see how inefficient the place was.
9ltogether, losses incurred by Japanese governmentrun businesses were reported to be
J19.3 million from 1;1; to 1;;<. This is a big number, compared with Japan’s estimated
national income of J39D million in 1;D; =about midway through the period>.
The cost of all the failed governmentrun businesses was borne on the backs of Japanese
peasants. The land ta(, enacted in 1;D3, was intended to provide the government with
steadier revenues. 9 peasant’s ta( bill was based on the assessed value of farm land, not
on the value of each year’s crop. 9 peasant had to pay substantially the same ta( every
year and pay it in money rather than bags of rice =the previous practice>. 6onse'uently,
the land ta( went up as a percentage of a bad harvest E perhaps to as much as C2
percent ? and went down as a percentage of a good harvest.
!oreover, spending on governmentowned businesses added to inflationary pressures,
already serious because the government assumed the cost of what used to be feudal
administration, the cost of suppressing the last samurai revolt =1;DD> and the cost of
providing pensions for idle samurai.
!onetary depreciation amounted to a ta( on everyone holding cash balances.
Fovernment debt soared from J<< million in 1;D1 to J4<C million by 1;D;. .ice prices
doubled.
$ottom lineH far from adding value, governmentowned businesses consumed scarce
resources. Gosses meant that fewer resources were available for more promising
agricultural as well as industrial ventures. Fovernmentowned businesses were a drag on
the economy.
)ven if governmentowned businesses had been successful, they weren’t big enough to
warrant the generous attention they’ve received in historical accounts of the !ei5i period.
The government was never a significant employer. Fovernment spending was estimated
to be 14 to 1C percent of the economy. -nly about oneseventh of the population worked
in manufacturing. The great ma5ority of those were in the te(tile industry.
9 turnaround began with the appointment of 6ount !atsukata !asayoshi as !inister of
%inance, -ctober 1;;1. ,e decided to embark on radical privati&ation, not because he
embraced capitalism but rather because governmentowned businesses didn’t work.
8obody running those businesses had a big personal stake in their success or failure. The
government policy of subsidi&ing failure had the perverse effect of encouraging more
failure.
9pparently the Japanese government ministries that handed out subsidies didn’t provide
detailed income statements and balance sheets for each of the governmentowned
businesses. They reported only aggregate total revenues and e(penditures for all
governmentowned businessesK %rom a management standpoint, such reports were
utterly useless. $y insisting on detailed financial reports for each governmentowned
business, !atsukata made everybody aware how pervasive the chronic losses were, and
this knowledge helped generate popular support for privati&ation.
The first attempted mass privati&ation was in 1;;2 when 1C moneylosing government
owned businesses were offered for their book value =without a depreciation allowance>.
$ut there weren’t any takers, a wakeup call that many governmentowned businesses
weren’t worth much, regardless how much money had been poured into them. 9fter that,
governmentowned businesses were offered to the highest bidder, regardless how low the
bids might be. 9t least future losses wouldn’t be on the government’s books.
In 1;;4, !atsukata began selling 5ust about all governmentowned businesses e(cept
steel and munitions factories. %or e(ampleH
I In 1;;<, %urukawa Ichibei paid J33;,222 for the 9ni 6opper !ines on which the
government had spent J1.D million.
I In 1;;D, Tanaka 6hobei paid J14,122 for the Aamaishi iron mines. The government had
spent J4.< million on the pro5ect but couldn’t handle technical problems. -nly J1D<,141
worth of iron was e(tracted before the operation was shut down.
I The government was able to reali&e only JD9,9<2 from the /hinagawa glass factory on
which it had spent J3<2,222.
$y 1;91, 41 large governmentowned businesses had been privati&ed. !atsukata also
slashed subsidies for privatelyowned businesses as well as governmentowned
businesses.
,e used the money saved or reali&ed to pay off an astounding 9D percent of Japan’s
national debt. It went from J4C< million in 1;;2 to 5ust J< million in 1;92. Fovernment
interest costs dropped accordingly. 8ational budgets were covered entirely by ta(es and
fees.
!atsukata encouraged private banking to tap private sector savings. @okohama /pecie
$ank, started in 1;;2, speciali&ed in foreign e(change transactions. It provided financing
for the growing e(port trade. ,ypothec $ank =1;91> handled agricultural lending. ,okkaido
7evelopment $ank =1;99> financed enterprises on Japan’s northern island. The Industrial
$ank of Japan =1922> raised foreign as well as domestic capital for newlyprivati&ed
industries.
The number of 5oint stock companies with at least J1,222 of capital soared from 1,49; in
1;;C to C,133 a decade later. John #hitney ,all observed that *It was not the
conspicuous heavy industries that accounted for the first statistics of economic growth or
gave Japan the base from which to gain its economic security in the world at large. -ne of
the most significant developments at this time was the e(pansion of silk production for
e(port. ,ere was an industry that had its roots in the traditional village economy, yet
served a growing international need. -nce the Japanese were able to moderni&e the
industry and work out the re'uirements of 'uality control sufficient to meet the )uropean
market, Japanese silks came into great demand. Japan became the world’s largest
source.+
9s commercial centers prospered, they stimulated agriculture where perhaps ;2 percent
of the Japanese population worked during the early !ei5i period. The closer farmers were
to a commercial center, the more they speciali&ed in producing cash crops like cotton,
silkworms, tea, oil, sugar.
!any Japanese farmers became entrepreneurs who produced cotton te(tiles, raw silk,
paper and tatami. %or instance, the most successful !ei5i silk reeler was an entrepreneur
named Aatakura Aentaro who started a small business on his farm. ,e developed the
business gradually, as he ac'uired machinery and improved his management techni'ues.
Aatakura sent his son to the :nited /tates so he could study the latest reeling methods
firsthand. Aatakura might not have attracted as much attention as the government’s
grandiose Tomioka %iliature, but he produced more silk.
Japan prospered with a profree market culture. %or e(ample, the educator %uku&awa
@ukichi was awed by the material wonders of 9merica and #estern )urope. ,e went on to
write /eiyo Ji5o =Things #estern>, a book that did much to inform Japanese people about
revolutionary economic changes going on. %uku&awa’s bestknown work was )(hortations
for Gearning that went through 1D editions and sold over 3 million copies. ,is opening
lines evoked the spirit of Thomas JeffersonH *,eaven did not create one man above
another nor one below another.+
There were many discussion clubs in Japan, perhaps inspired by $en5amin %ranklin’s
Junto, and one of the most influential was the !eirokusha. This was a forum where
%uku&awa talked about the ethics of bunmei kaika ? *civili&ation and enlightenment.+ ,e
argued that selfreliance, rational behavior, free trade and entrepreneurial profits were
keys to Japan’s progress. %uku&awa started Aeio F5uku, a school that encouraged
Japanese to become entrepreneurs rather than bureaucrats. Aeio F5uku became Aeio
:niversity, one of the most respected universities in Japan. %uku&awa started !aru&en, a
trading company that became Japan’s biggest book importer. #hen people are free,
%uku&awa declared, *there is nothing in the world that can withstand man’s courage and
intellect.+
:kichi Taguchi published Jiyu Aoeki 8ihon Aai&a .on =9 %ree Trade "olicy %or Japan>
which, inspired by the great free trade champions 9dam /mith and .ichard 6obden,
e(plained why government protection of industry undermines crucial incentives to adapt in
a changing world. :kichi’s book went through many editions.
#estern books about the moral dimension of markets en5oyed startling popularity. /elf
,elp, by the popular )nglish author /amuel /miles, was translated as/aikoku.isshi,en
and sold over a million copies. This book was followed by /miles’ 6haracter =/eiyo ,inko
.on> and Thrift =/eiyo /etsuyo .on>. $en5amin %ranklin’sThe #ay to #ealth was
published as Aanetame no ,iden, and it did well.
9ccording to economist 9ngus !addison who spent many years estimating F7" statistics
for many countries, between 1;D2 and the death of )mperor !ei5i in 1914, the Japanese
economy e(panded about 1;2 percent. $y comparison, during this period 6hina
e(panded about 32 percent, India about 32 percent, %rance about 122 percent, Freat
$ritain about 132 percent, Fermany about 41< percent, and the :nited /tates about C22
percent. Japan’s growth was a remarkable performance, thanks to the private
entrepreneurs who created wealth and the government officials who got out of their way.
$ut the Japanese never forgot that their nation was forced open. They came to believe
that they needed an overseas empire like the #estern nations with their terrifying black
ships. That reckless 'uest, as it turned out, led to death and destruction. 9 later generation
found redemption by again focusing on peaceful markets.