Japan and World Depression

What can we learn about the wealth of nations and the possibilities of peace between them by comparing the Japan of 50 years ago with the Japan of today, and specifically by basing that comparison on Japan’s responses to the exigencies of a world depression? Such is the common theme to which the papers which follow each seek to make their contribution.

To find myself in 1925 sailing for Japan within six months after completing Part II of the Economics Tripos at Cambridge was for me an unexpected and surprising sequel. I think it must have been D. H. Robertson, who suggested to a younger economist, Mr (now Sir) Austin Robinson, that I, as one of his students, might be interested in a request that he had received for a Cambridge man to fill a position in Japan in a commercial college at Nagoya, less well known then than it is now since it became the economics department of Nagoya’s National University. The suggestion attracted me at once. Some members of my family were opposed to my going, in particular my parents who were advanced in age and wanted me to take posts on offer in Britain rather than to disappear to the other side of the world. Reluctantly, I agreed to apply for a post at Nottingham University College. The interview went well, but, fortunately for me, a young Scotsman was finally selected. Never was I more pleased at being rejected, and I telegraphed my acceptance to Japan without further consultation.

Depression is the breeding-ground for protection. Thus, in addition to the production lost through unemployment and idle capacity, there is a further loss from the less efficient use of the world’s scarce resources. Nor is this all. For the protective barriers flung up and strengthened when times are bad may well remain in position when good times have returned — good times that would be better if these impediments to the freer flow of goods and services could be removed. This was what happened in the aftermath of the Great Depression of the early thirties when the gradual chipping away of protective policies proved to be a slow and arduous exercise. The recession of the early 1980s has obviously some similar features. Again the pressure for increased protection intensified and had succeeded, by 1984, to the point where a substantial proportion of world trade — perhaps half in the case of Britain — was affected by quota arrangements of one kind or another. Nor was this pressure then exhausted. On the contrary there was good reason to fear that the move away from freer world trade would continue. Thus the similarity with the experience of the thirties is clear enough, but there are also important differences, for a number of the determining factors are different, including the scale of the depression itself.

This title is taken from Professor Penrose himself.¹ His two-part essay was presumably written during the academic year 1934–5, a time of ‘false recovery’ ² from the Great Depression of the 1930s. My own effort has two aims: (1) to comment on Penrose’s discussion of Japan in the early 1930s in the cold, clear light of hindsight, and (2) to compare that period with Japan’s role in the current world economic malaise — depression seems too strong a term. (This malaise, or depression if you insist, is also experiencing as I write — autumn 1983 — what may be a ‘false recovery’.³)

This paper is an attempt to outline the major changes which took place in the Japanese economy in the interwar period, from the end of the First World War until the start of full-scale hostilities in China, in the hope that a comparison of the two periods 1920–30 and 1931–6 may be useful in considering modern Japan’s relations with the rest of the world economy.

In the twentieth century Japan experienced two major depressions, one in the prewar period (the ‘great depression’) and one in the postwar period (the ‘oil crisis depression’). These two events were of great significance in Japan’s history and each of them can be regarded as a turning-point in Japan’s economic development.¹

What difference does half a century make? The men whom Ernest Penrose taught in Nagoya are now either retired or occupying those honorific top posts which give the Japanese business world the appearance of a gerontocracy. The pace of change in their lifetime has been hectic, the secular trends — of output growth, increasing technical and intellectual sophistication, rising welfare levels, etc. — being overlaid by shorter-term swings of war and political upheaval of a violent kind. But what are the relations among those secular trends, institutional changes and cyclical upheavals? Is the Japan of the 1980s a less fragile society, with better adapted and more firmly established institutions, less liable to produce civil disorder or external military adventure, than the Japan of the 1920s and 1930s?

Even though the polling of public opinion as an aid to democratic politics was beginning to be practised in some Western countries during the 1930s, it made scarcely any progress in Japan until after the 1945 defeat.¹ The militaristic and authoritarian principles on which government was increasingly based as the 1930s wore on could scarcely have been less conducive to the principle or practice of seeking to find out objectively what the population at large thought and felt about particular issues. There was, it is true, a complex network of communication between communities at the local level linked ultimately to nationwide organisations. Local community groups called burakukai, chōnaikai and tonarigumi had become by the wartime period essentially the lowest-level instruments of government control, functioning as mobilisers of the population to perform tasks required by the government rather than in any real sense as a means of finding out what ‘public opinion’ was thinking. To a large extent local control through the Ministry of Home Affairs had by the late 1930s come to replace the increasingly moribund political party networks, so that structures of communication having at least some representative purpose came to be replaced by structures whose sole function was mobilisation and control.²

So spoke Inoue Junnosuke to the economics students of the Economics Faculty of the University of Kyoto in 1926. He had earlier lectured in similar vein to the economics students of Hitotsubashi University in Tokyo. The name of Inoue Junnosuke was one to conjure with. After a long career with the Yokohama Specie Bank, he served as President of the Bank of Japan from 1919 to 1923 and again from 1927 to 1928. He had been called from there to act as Minister of Finance, first in 1923–4 and later in 1929–30. It was therefore something of a scoop for these universities to receive a course of lectures from an important practitioner in the field of economics and banking. And it was interesting that Inoue should in his peroration enjoin the students of Kyoto to devote themselves to the study of economics as a national duty.

Russo-Japanese relations have seldom been happy. One recalls the clash of their interests: Manchuria and Korea at the turn of the century, culminating in the war of 1904–5, in which Russians lost on land and on sea, and the Japanese were established as a major world power. Russia’s defeat still left her in effective control of Northern Manchuria, with its vital rail link to Vladivostok, and Harbin remained a predominantly Russian city until the thirties. However, Russia remained on the defensive in this area until 1945.

The modern history of Sino-Japanese economic relations extends from the late nineteenth century to the present. It is a story of extraordinary interest — not least because its present phase is far from complete. Before 1949 Japan’s economic adventure in China involved not only commodity trade, but direct investment, population migration, military occupation, experiments in economic planning and, ultimately, nominal political independence within the Japanese imperial system and a ‘rationalised’ position within the Greater East Asia Co-prosperity Sphere. The defeat of Japan in 1945 and the establishment of the People’s Republic of China in 1949 ended both the political dream and direct involvement in the Chinese economy. The influence of the Japanese past, however, remained a critical determinant of China’s development in the 1950s; and after 1960, severance of China’s links with Japan’s long-standing rival in China, the Soviet Union, resulted in renewed development of trade. The re-establishment of diplomatic relations in 1972 was followed by further growth of trade and of increasingly complex financial, resource and political relationships. Today, Japan is arguably China’s most important economic link with the outside world and a key to her economic future; although to the Japanese, who have resolved the problems of their inter-war economy outside the East Asian region, China’s importance is perhaps more political, strategic, even psychological, than economic in the narrow sense.

A major cause for Japan’s emergence by the late nineteenth century as a significant economic and military power was the relative ease with which feudal fief particularism gave way to a broader all-encompassing nationalism. In being confronted in the mid-nineteenth century by a perceived hostile external world after two centuries of isolationism, Japanese, irrespective of their origins, were struck by their ‘Japaneseness’. While the nation-building process has been remarkably successful, Japan’s place and role in what tends to be referred to euphemistically as the ‘international community’ have generated problems both of policy and identity. Whereas in the course of the postwar decades the cornerstone of Japan’s foreign policy has been its relationship with the USA, more recently there has been a tendency to shift emphasis in the direction of Japan’s neighbours. As a senior Keidanren official has stated: ‘Hit hard by the United States and Europe on the trade policy front, Japan is psychologically set to seek hands [of friendship] in Asia and especially ASEAN.’²